With the 2017 tax rates expected to revert by 2026, federal employees and pensioners are being advised to consider Roth conversions to lower their upcoming tax liabilities potentially. This involves moving pre-tax or tax-deferred assets into a Roth IRA, thus locking in the current lower tax rates for tax-free withdrawals in retirement. However, individual financial circumstances vary significantly, so consulting with a knowledgeable tax advisor beforehand is advised.
The urgency for potential Roth conversions is tied to the impending changes of the Tax Cuts and Jobs Act (TCJA) of 2018, which reduced taxes temporarily but will revert to pre-TCJA rates after December 31, 2025. A Roth conversion requires upfront taxes but offers tax-free retirement withdrawals, providing the account has been open for at least five years, and the holder is over 59.5 years old. This may be particularly beneficial for those expecting higher income tax rates in the future, but it’s crucial to review personal situations thoroughly and potentially seek professional tax advice.
Tax rates for 2026 are predicted to increase significantly, especially for middle-tax brackets, making a Roth conversion during low-tax periods appear strategic.
Exploring Roth conversions for upcoming tax changes
The Roth conversion process involves a distribution from a Traditional IRA, followed by paying the total distribution amount taxes and then moving the funds into a Roth IRA where they can grow tax-free.
Partners of federal workers and retirees stand to gain from Roth conversions as these accounts do not attract income tax upon distribution. This can be especially advantageous for surviving partners facing elevated tax rates when moving to single filer status and those in lower income brackets due to tax-free distributions. Additionally, the absence of required minimum distributions allows Roth accounts to grow tax-free for extended periods.
Roth conversions can lessen future Required Minimum Distributions (RMDs), which are increasingly crucial with the expected tax rate rise post-TCJA’s expiration. RMDs vary based on birth dates, with different categories listed for those born before July 1, 1949, between July 1, 1949, December 31, 1950, January 1, 1951, December 31, 1958, and after December 31, 1958. When contemplating Roth conversions, remember that they could help reduce these future RMDs.
